Simplicity is the ultimate sophistication…

I have taken 3 economics courses purely from interest and the money multiplier equation didn’t exactly make much sense to me. I sort of half-accepted that the money grows somehow, but the mechanism didn’t really click.

Only recently, I stumbled upon an article by Gary North, who was commenting on Murray Rothbard’s The Mystery of Banking, on how the fractional reserve works like a Ponzi scheme – basically take someone’s money and give it to someone else as if a return. Where’s the wealth creation?

My basics tell me:

Money couldn’t be at 2 places at one time. Not without the real wealth backing it up.

You’re entitled to your money that you deposit into the bank – but since the bank is busy using it elsewhere to “create” more money – you’re somehow restricted in withdrawing.

If you’re debating and defending the fractional reserve still, my only question to you is:

Don’t your banks restrict your withdrawal somehow? And they charge you more if you want unlimited withdrawals?

To quote from the article:

It should be clear that modern fractional reserve banking is a shell game, a Ponzi scheme, a fraud in which fake warehouse receipts are issued and circulate as equivalent to the cash supposedly represented by the receipts.

Not much liquidity (actual depositors money are elsewhere) and the economy could easily brake if loans turn out bad.

Lo and behold, Bundesbank chief recognized the big weakness (or fraudulence) in fractional reserve banking. (I’m quite sure many more bankers or chief economists would too). Mr Axel Weber said he favoured forcing banks to increase their levels of liquidity and capital reserves – which is to be proposed by the G20’s Financial Stability Board, set up at the last meeting in London in April.

So instead of keeping 10% and lend out 90%, banks should keep 90% and lend out only 10%?

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